Home Equity Loan Interest rate
Word EMI stands for Equated Monthly Installments this is the amount required to be paid every month for the complete period of loan by a customer of the bank or Finance Company the home equity loan interest rate of whom has been disbursed .Naturally both the loan amount and the interest is to be taken care of. If it is simple interest then the calculation is very simple once the rate of interest is decided.
But normally the banks calculate interest in a different way and interest is calculated for only the remaining amount after the payment of the installment every month. Naturally this will mean a different amount of interest every month and hence a different amount to be deposited every month . Obviously this is impossible to achieve. This is why an amount is fixed for the whole period known as EMIs and calculations are made by established formulae.
There are three ways the banks calculate the EMIs
1.Flat Rate System
2.Reducing Balance
3.Rate System
THE principal plus the interest divided by no. of installments gives the EMI in the Flat rate system
In the reducing Balance system every time the installment is paid the principal is reduced by the amount paid-up and the interest is taken for the remaining amount. This type of system can be further classified as
Monthly Reducing
Quarterly Reducing
Yearly reducing
The principal is reduced at these intervals for the diminishing interest calculations.
The third system is the rate system or more commonly called the floating rate system .In this the rate of interest is reset after every quarter or every year. The basic calculations are based on the reducing balance system .
Formula
The EMIs are calculated with the following formula
EMI = (p*r) (1+r)^n
-------------------- * 1/12
(1+r)^(n 1)
p = principal (amount of loan),
r = rate of interest per installment period, i.e., if interest is 12% p.a.
r = 1 if loan is yearly reducing
r = 3 if loan is quarterly reducing
r=12 if loan is monthly reducing
n = no. of installments in the tenure,
^ denotes whole to the power.
The main thing to watch while using this formula is the value of r . It is the rate for the installment period . This means it will be R/12 for monthly system , and R/4 for quarterly and R for yearly systems where R is the rate of interest the bank is charging per year.
PEMI and its calculations
Sometimes the full home equity loan interest rate amount is not disbursed at a single time , say in case the flat is under construction and a part money is paid by the bank for the initial period. The EMIs will start after the full payment of the amount by the bank and till that time interest will have to be paid as an installment .This is Known as PEMI. Here the interest rate is same as the basic rate agreed upon.
The computation of PEMI is done as follows :
Amount disbursed * Rate of Interest
EPMI = --------------------------------------------- * No of days it is due
365
Composition of EMIs with time
It becomes very shocking to learn that even after repaying for quite a no. of years the home equity loan interest rate amount reduces only slightly in the start. For this it is very essential to understand the repayment plans.
At the start of loan the interest portion of an EMI is much more than the Principal. As an example one of the calculations show that on an EMI of Rs 1349 ,Rs.875 is the interest part and Rs 474 is the Principal part. This means the amount of interest paid is apx double the amount of Principal paid back.
There is however nothing wrong with this formula because if you go on computing the parts then you will find that home equity loan interest rate in the last years of your loan-returning the scene is opposite and the Principal amount is much more than the interest part .
So many times people wish to payup the loan earlier . Since the tax portion of the EMI is less in the end , the tax saved is not much, plus, the tax rebates are also lost. This is why it is so many times found that it is beneficial to let the loan go as it is rather than terminating it before time .
Varying rates of EMI
As discussed earlier there are three ways an EMI can be calculated . It is interesting to know that from the same formula the values got are different .While EMI of the yearly reducing system is the highest , the values for the monthly reducing system are the lowest. In the yearly reducing system every year the bank reduces the Principal amount after calculating the amount paid up in the year. The interest rate decreases now. But if we watch the rate of interest was higher than the calculated one if the Principal was reduced every month .This means for full 11 months we paid a higher interest. Since the loans are for very very long periods the amount accumulates and one has to pay in tunes of many thousands by the end of the day . There are banks which sometimes calculate on the daily basis. It is quite obvious the repayment is best in these banks.
All banks and Financial institutions have a standard method of computing the interests. No one changes its basic method for an individual customer. Hence it is for the loan taker to investigate on what terms he is getting the loan . Apart from the rate of interest it is very very essential that one sees the EMI he has to pay and the way it is computed.
In general the nationalized and foreign banks calculate on the daily or monthly reducing system and the Indian Financial companies use the quarterly and yearly reducing systems.
The cheapest home equity loan interest rate can be classified as the one with the lowest emi .But apart from this there are some other headings that are added to the final amount.These are things like Processing Fee and Administrative charges. This amount pinches only when they are actually paid .But by that time things have gone too far and one is left with no other option but to pay off .
Pre-pay and Part-pay
If inbetween the loan period you decide to pre-pay a lump sum amount then there are two options with you
1.Reduce emi and let the period of repayment remain same
2.Pay same emi for a lesser period.
Normally all banks allow this type of payment and charge a fee for that. But the terms and conditions are different for different banks and hence all considerations should be taken into account and a very clear understanding should be thrashed out. There are instances when people had to pay for a much longer period even after paying some amount in advance.
Balance Transfer
If during the loan period which is normally 10 20 Yrs the general interest rate
falls. Then some companies come out with schemes by which you terminate the old loan
and payback the rest of loan by lower emis calculated at the changed rate of interest .
This is known as the balance transfer. Naturally the Fee etc. that has to be paid for
terminating the loan is also to be taken care of. Like this so many alert customers are able
to save lot of money.
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